The following additional information is available:

1. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the income statement above. Sales commissions are 10% of sales.

2. The same equipment is used to produce all three books, so the equipment depreciation cost has been allocated equally among the three product lines. An analysis of the companys activities indicates that the equipment is used 25% of the time to produce cookbooks, 45% of the time to produce travel guides, and 30% of the time to produce handy spellers.

3. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 49,600 square feet of space, of which 7,600 square feet is used by the cookbook line, 24,400 square feet by the travel guide line, and 17,600 square feet by the handy speller line.

4. The general sales cost above includes the salary of the sales manager and other sales costs not traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars.

5. The general administration cost and depreciation of office facilities both relate to administration of the company as a whole. These costs have been allocated equally to the three product lines.

6. All other costs are traceable to the three product lines in the amounts shown on the income statement above.

The management of Diversified Products, Inc., is anxious to improve the publishing companys 5% return on sales.

Required:

1. Prepare a new contribution format segmented income statement for the month. Adjust allocations of equipment depreciation and of warehouse rent as indicated by the additional information provided.

2. Based on the segmented income statements given in the problem, management plans to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide. However, based on the new contribution format segmented income statement that you prepared:

a. Do you agree with management's plan to eliminate the cookbook?

b-1. Compute the contribution margin ratio for each product.

b-2. Based on the statement you have prepared, do you agree with the decision to focus all available resources on promoting the travel guide?

Diversified Products, Inc., has recently acquired a small publishing company that offers three books for sale-a cookbook, a travel guide, and a handy speller. Each book sells for $12. The publishing company's most recent monthly income statement is shown below Product line Total Travel Handy Company Cookbook $ 310,000 $ 94,000 Guide Speller Sales Expenses: $ 154,000 $ 62,000 Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities 63,200 11,800 3,800 3,720 5, 800 2,100 6,200 14,200 14,200 2,480 , 200 141,200 51,300 $ 18,500 (5,000) 12,800 $ 10,700 104,000 29,000 38,000 13,700 5,640 35,000 20,000 2,100 9,400 2,60014,200 3,760 1,200 99,000 20,500 9,240 9,200 2,100 15,400 18,600 6,300 31,000 12,400 3.600 291,500 6,160 1,200 Total expenses Net operating income (loss)